June 10, 2008

Vicarious liability for employees’ misconduct

Vicarious Liability: Organizations May Have to Pay for the Misdeeds of Their Employees

Employers are not liable for all wrongful acts of their employees. Traditionally, employers in Canada have only been vicariously liable for acts that were committed in their employees’ “course of employment,” meaning the act was explicitly or implicitly authorized by the employer.

It would also apply if the employer authorized the employee to perform an act, which in itself was not wrongful, but the employee chose to perform that act in a wrongful manner.

Recent expansion in this area of the law is exposing employers to risks of vicarious liability for employee actions that are clearly beyond the employees’ course of employment and which in fact appear to extend to employees doing precisely the opposite of what they have been hired to do.

Vicarious liability claims have become more frequent because the courts are willing to look to the “deep pocket” to compensate victims for the acts committed by wrongdoers who lack the money to compensate victims.

One reason that employer vicarious liability remains controversial — despite having existed for centuries — is that the policy rationale underlying this doctrine is uncertain.

In short, while no one doubts that employer vicarious liability exists, there is no general agreement as to why it exists. This disagreement is not merely a sterile academic debate; employer vicarious liability for the misconduct of employees may vary depending on the policy rationale that is accepted as animating and forming the base of the doctrine of employer vicarious liability.

There are several general contemporary schools of thought on the policy rationales as to why employers should be vicariously liable for the harms caused by their employees. Most notable are the following:

Cost internalization and loss distribution — As a matter of efficiency, an employer is better able to distribute the costs of employee-caused damages through higher prices. Employers generally have deeper pockets than either the victim (of the employee’s deliberate misconduct) or the employee himself and are better able to absorb and distribute the loss. It is reasoned that since the employer benefits by having its employee provide the services for which the employer receives remuneration, that it is the employer that must run the risk of the employee causing harm.

Deterrence and corrective justice — Employers, knowing that they can be held faultlessly liable will be encouraged to improve hiring, firing, training and supervisory practices to control or reduce the harms caused by their employees. Employers, it is argued, are in a better position to control or reduce the harm caused by their employees than are the victims.

It appears that the Canadian courts have accepted the pragmatic policy considerations underlying vicarious liability as expounded by John G. Fleming in The Law of Torts (9th ed., p.410), “The modern doctrine of vicarious liability cannot parade as a deduction from legalistic premises, but should be frankly recognized as having its basis in a combination of policy considerations. Most important of these is the belief that a person who employs others to advance his own economic interests should in fairness be placed under a corresponding liability for losses incurred in the course of the enterprise; but the master is a more promising source of recompense than his servant who is apt to be a man of straw without insurance; and that the rule promotes wide distribution of tort loses, the employer being a most suitable channel for passing them on through liability insurance and higher prices.”

The doctrine of vicarious liability has never required a plaintiff to demonstrate any degree of fault or negligence on the part of the employer. It has always recognized that liability flows to “innocent” employers in favour of “innocent” victims, and has justified this outcome on the basis of public policy considerations.

While the concept of no-fault employer liability for negligent or willful and deliberate acts of employees is accepted and may be necessary, its application will continue to prove to be troublesome, often inconsistent, ill-explained and misunderstood, as long as it is dominated by public policy considerations and the courts continue to look for employers with deep pockets to compensate claimants.

Some examples of recent vicarious liability decisions are the following:

In British Columbia Ferry Corp. v. Inicta Secuirty Service Corp. (1998), 167 D.L.R. (4th) 193 (B.C.C.A.),  the Deas Island docking facility near Victoria, British Columbia, went up in flames in what appeared to be arson.  Its owners wondered how the arsonists were able to act while a security guard was on duty. How did they avoid him? Was he asleep, absent or otherwise derelict in performing his duties? It turned out that the guard himself was the arsonist.

British Columbia Ferry Corp. took Invicta Security Service Corp., the agency hired to provide security and the guard’s employer, to court. The court ruled Invicta was vicariously liable. Vicarious liability in its simplest term means that a person or corporation is legally responsible for the misconduct of another. In the context of employment law, it means employers are liable for certain wrongs, either negligent and/or intentional, committed by their employees.

The guard had given two versions of events. The first, given to police shortly after the fire, was that he observed it on a video monitor in the guard station.

The second, given after he failed a polygraph test, was that he started the fire accidentally by tossing a lit cigarette into a bucket he assumed to contain water which then burst into flames. No bucket was found after the fire.

A fire inspector concluded the fire could not have been started in the way the guard testified. The Court, therefore, not surprisingly, found that the fire was deliberately set by the guard. Damages in the amount of $65,000, together with costs, were awarded against the employer because the company had been hired to protect and secure private property. The security company’s employee did precisely the opposite by setting fire to that property.

In Choi v. Sutton Group Central Realty Inc. (1998), 1998 CarswellOnt 354 (Gen. Div.), a real estate company was found vicariously liable for fraudulent real estate transactions committed by its agent. The victim of the fraud was a home seller who had difficulties with the English language. The agent took advantage of this and defrauded her of her deposit monies. The court determined that the real estate company had enabled the agent to commit the fraud and that therefore it should bear the loss..

In Bazley v. Curry, [1999] 2 SCR 534 and [1999] 2 SCR 570., a child-care institution was found vicariously liable for the sexual assaults committed by its employee against children. The employer was in the business of providing care to children. The pedophile employee in question provided the precise opposite of care. In this case, the Supreme Court of Canada expanded the scope of liability found under traditional vicarious liability and concluded the conduct for which the employer is vicariously liable is conduct which consists of either:  acts authorized by the employer; and unauthorized acts that are so closely connected with the authorized that they may be considered to be regarded — although incorrectly — as doing what has been authorized by the employer.

In other words, the nature of the employment relationship is being considered to determine whether there is a substantial connection between the employee’s job function and the intentional misconduct.

It is interesting to note that a similar employer was found not to be vicariously liable (narrowly by a four-to-three decision of the Supreme Court of Canada in reasons released the same day as the Bazley v. Curry case) in a situation where the wrongdoing was for the most part not committed on the employer’s premises, but in his own home. (Jacobi v. Griffiths).

Given the scope of influence and power that the Executive employee has, it is clear that the Executive employee has a greater chance to cause harm.  There are less institutional controls on the Executive employee.  He or she has greater autonomy.  A corporation only “acts” through the activities of its employees and typically it is the Executive employee who performs the actions of the greatest importance and consequence.  The Executive employee may engage in acts of corporate fraud, diversion of corporate opportunity, breach of trademark, etc. that are so closely connected with the authorized acts of the employer that the acts may be considered to be regarded — although incorrectly — as doing what has been authorized by the employer.   Vicarious liability of the employer for the Executive’s acts would follow as a result of the above-noted Supreme Court of Canada decisions.

Protecting Your Firm

Employers can never fully protect against all potential liability for the wrongs committed by their employees. However, certain measures may help to reduce the possibility of these types of claims being successful.

What employers often fail to emphasize is proper reference checking. Most behaviours are not isolated, so background checks may yield valuable information. Contact at least three previous employers if possible. Ask about the candidate’s reliability, attendance record and working relationship with co-workers, management and customers if applicable.

Depending on the type of position in question, psychiatric testing may reveal valuable insight into a potential employee’s suitability. In other cases, conducting checks may be warranted for determining whether there is a criminal history, highway violations or licence-related infractions or restrictions, such as impaired driving charges. Even a candidate’s credit history may be relevant to positions where money is being handled.

Every HR department should have in place a process by which candidates can be thoroughly screened in a manner that is in accordance with the human rights legislation.

Here are a few key points to keep in mind:

Identify areas of vulnerability. One way to determine weaknesses is to examine areas in which employees have unsupervised and/or unregulated power over potentially vulnerable third parties, including other employees.

Review hiring and job placement practices. Once potential weak spots have been identified, these matters can be considered in hiring and job placement decisions. The importance of adequate interviewing, screening and background search techniques cannot be over emphasized.

Assess existing employees. Ongoing employee evaluation and training is essential and where problems appear employers must consider the need for discipline or potentially dismissal.

Consider insurance coverage. Employers should review their existing insurance policies to determine to what extent, if any, they will be compensated in the event of a successful claim made for negligent or intentional damage caused by an employee.

Employers need to understand that no fault liability, as described above, does exist at law and its application appears to be expanding.

Chris Foulon is a Partner of Israel Foulon LLP, a leading employment and labour law firm in Toronto. Chris can be reached at 416.640.1550 or cf@israelfoulon.com

 

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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